EU Fumbling on Cyprus Makes Rehn Scapegoat for Austerity

By Ben Sills -
Mar 21, 2013

European Union Economic and
Monetary Affairs Commissioner Olli Rehn has emerged as the
frontman for crisis-management policies driven out of Berlin
that are spreading economic pain as debt turmoil reignites.

Rehn faced a torrent of criticism and a call to resign
after helping broker a rescue package from Cyprus that fell
apart on March 19 over a demand to raid bank deposits. He has
become the defender of German-inspired austerity that helped
deepen the 17-nation euro region’s recession.

Almost two years after Rehn announced the “beginning of
the end” of the debt crisis, the euro area is headed for a
back-to-back annual economic contraction for the first time.
Now, Rehn has become a scapegoat as Germany and the
International Monetary Fund let the commissioner take the rap
for the Cyprus bailout that hangs in limbo, said an EU official
who declined to be named.

“As soon as things go wrong, people start looking around
for who to blame,” William White, former head of economic
analysis at the Bank for International Settlements, said in a
March 19 telephone interview. “Everybody will be pointing the
finger.”

The conflict over a country that makes up 0.2 percent of
the euro zone’s 8.6 trillion-euro ($11 trillion) economy may
jeopardize the gains that Rehn helped shepherd over the past
three years of crisis fire fighting. In that period, the EU has
set up two rescue funds, passed eight economic-governance laws,
enacted a deficit-limitation treaty, and agreed to a “roadmap”
for a better-run monetary union.

Austerity Criticism

The challenge Rehn, 50, is facing over the Cypriot bailout
comes on top of criticism of the austerity he has administered
to other nations as a condition for receiving loans.

Nobel laureate Paul Krugman, who has called on European
leaders to increase spending to boost growth, labeled Rehn’s
policy decisions “cockroach ideas” because they keep coming
back no matter how hard you try to stamp them out.

“The amazing thing is the way men who know neither theory
nor the history of previous crises are utterly convinced that
they know what to do in our current crisis; and how their
confidence in their prescriptions has been unaffected by the
fact that they have been wrong about everything so far,”
Krugman wrote on his blog this month. “What’s even more amazing
is the fact that these men are actually running things.”

Greek Forecasts

In May 2010, the Greek government agreed to 30 billion
euros of austerity as a condition of its first rescue package.
Rehn, three months into his role as budget chief, forecast the
Greek economy would contract 3 percent that year and 0.5 percent
in 2011.

The economy shrank by 4.9 percent and 7.1 percent as the
budget-cutting program crushed domestic demand. Last year, when
Rehn forecast a 1.1 percent expansion for Greece, output slumped
6.4 percent, according to the commission’s latest estimate
published last month.

Krugman has “engaged in more of a zoological debate than
an economic debate,” Rehn told the Finnish newspaper Helsingin
Sanomat this month. “It’s been unclear to me where the money
for the stimulus would have come from.”

Rehn, who received a doctorate in international political
economy from Oxford University, describes himself as a fan of
the U.S. counter-culture of the 1960s and traces a line from
rock legend Neil Young to incoming Bank of England governor Mark Carney, having observed that “Canadians are cool.”

‘Saving Europe’

He cited Carlo Bastasin’s “Saving Europe: How National
Politics Nearly Destroyed the Euro” as one of his favorite
books of 2012.

“It’s based on a very sound understanding of the economics
and politics of the euro, and is well-researched,” he said.

Now he’s fighting those battles all over again, trying to
bring together German Finance Minister Wolfgang Schaeuble, whose
government will face bailout-weary voters in September, and
Cypriot officials who’ve seen their banking system hobbled by
losses on Greek sovereign bonds.

European finance ministers said they had a deal with the
International Monetary Fund and Cypriot President Nicos Anastasiades after negotiating through the night of March 15.
Anastasiades agreed to impose a levy of 6.75 percent on bank
deposits of up to 100,000 euros and 9.9 percent on amounts above
that threshold in return for a 10 billion-euro rescue package.

Unraveling Deal

“This has been a very difficult process, but the result
conceived tonight reaches the essential goals of both
maintaining financial stability and ensuring debt sustainability
in Cyprus,” Rehn said at a press conference shortly before dawn
on March 16 in Brussels. “It is so important that this
political agreement has now been reached.”

The deal began to unravel almost immediately with
protesters on the streets of the Cypriot capital rejecting the
deposit tax. Lawmakers killed it March 19 and now officials are
scrambling for a Plan B.

“It’s a bit unfair to pick on Rehn, but he’s an easier
target than Schaeuble,” Charles Wyplosz, director of the
International Center for Money and Banking Studies in Geneva,
said in a telephone interview. “Anyone in the room who failed
to see that was a mistake is to be blamed.”

Rehn is the one getting the public censure.

Nessa Childers, an Irish member of the European Parliament,
called for his resignation in a March 19 letter to Jose Manuel Barroso, president of the European Commission, which proposes
policies enacted after approval by governments and the European
Parliament.

“Somebody somewhere has to be accountable and the buck
stops with him,” Childers said in a telephone interview. “This
was not only undemocratic, but incompetent. Was anyone thinking
about the big picture?”